My sister and I have a three-bedroom house in the Clairemont section of San Diego, which we are renting out. The rent has been $1,700/month since our mom died a couple of years ago. My sister wants to raise the rent $100/month and have the tenants sign a lease. She says a lease would give them the piece of mind that we won’t raise the rent again for another year. Who raises the rent more than once a year anyway? Seems like a lease would give us the piece of mind that the tenants won’t move, while not giving them anything. I almost never hear a peep from the tenants. They pay their rent on time. Twice they have deducted plumber’s costs from the rent.
On one hand, it’s a business. We have a license from San Diego that says it is. It’s the nature of rents to increase over time. And the mortgage on my house (my own residence) went up when the property was re-assessed for taxes. My share (35%) of a $100/month increase in the rent on the San Diego house would cover the increased mortgage payment here. On the other hand, I don’t want to lose tenants who pay on time.
My sister tends to take the most advantageous-to-her data as gospel, while disregarding negative data. I tend to be more pessimistic, and don’t like dealing with financial matters.
How do I find out the prevailing rental rates for a three-bedroom, two-bath (or is it one-and-three-quarters? One has a shower instead of a tub) house with yards and a garage in the Clairemont area? What’s a fair increase in the rent?
How about checking Craigslist for comps? Your sister has her priorities messed up. A good tenant is golden. A shitty tenant is going to cost you a lot more than $1200 a year, if not financially then emotionally. The emotional grief is generally worse than the financial aspect (to a degree, of course).
If they’ve been in the house for several years, a 5% increase doesn’t sound unreasonable. I’d give them a month or two notice of the increase and tactfully point out that it’s been several years and will likely be 2 or 3 years before you consider it again.
I’d forget the lease though, as Darryl Lict points out, don’t kill the golden goose. If they move out you can go to a lease w/ the next tenants.
Johnny, the rule of thumb, for a residential rental, is that you should get between 10 to 12% of the market value in annual rent. That should cover expenses and give you a reasonable return on your investment (the value of the property). Of course there may be local conditions that modify that. For example I’m guessing that SD was a hot market in the recent runup and that, w/ the current credit crunch, you probably wouldn’t want to sell right now. While the soft market may make rentals a bit more valuable, it has also affected property values. You can drive yourself crazy trying to factor all these things in, but, in the end, good tenants are worth keeping and if you’re near to the 10-12% figure you’re doing good.
In that case you should probably ride out the current slump and then put it on the market. You’re probably not even breaking even on your investment, after you deduct expenses. You’ll need to consider any tax liability in your decision, but why continue the risk of being a landlord when you could park the money in a very safe investment and do better?
Who raises the rent more than once a year anyway? Seems like a lease would give us the piece of mind that the tenants won’t move, while not giving them anything. I almost never hear a peep from the tenants. They pay their rent on time. Twice they have deducted plumber’s costs from the rent.